Yields aid the dollar!

The EUR found its breaking point. OPEC dictated its breaking point and the USD bear’s were just broke. All the asset classes turned on a dime yesterday once the USD found the sweet spot. The dollars strength was driven by the US yield curve. With stronger global growth rates being announced by China (+8.9%) and South Korea (+2.9%), it was only a matter of time that Yield curves would begin to reflect this. We have the Fed meeting next week and capital markets continue to expect a sign of an exit strategy from policy makers. The stronger than anticipated US earning season is now being priced in by the bond market and providing support for ‘a stronger dollar policy’! Being the contrarian, what if yields are rising in anticipation of the ending of several Fed programs? One needs higher yields to attract Capital! Are all company earnings priced in? Are they based on incentive programs or inventory clear out? It’s somewhat surprising to see the Fed policy makers talking the USD up and not Geithner. With the holiday season and liquidity issues to begin, do not be surprised to see the dollar maintain an upward momentum until year-end!

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

With no US data yesterday, thank god for rumors, which were eventually vindicated, managed to breathe life into a dull threatening session. All the asset classes completed a u-turn by day’s end with equities ending in the red, with the USD rebounding aggressively from its 14-month lows and FI yields easing a tad from their new highs despite a record amount of US debt to be issued this week. The latter of course will be priced accordingly, weaker, but, it will be interesting to see what the foreign appetite will be like. Higher FI yields should provide further support for the USD ahead of next weeks Fed meeting. Some risk appetite has returned to the market after Chinese officials indicated that industrial production will increase +16% this Q and also reported a +190% hike in overseas investment for the 3rd Q! This emphasizes their nation’s role in ‘driving a global economic recovery’. It’s not a bad way to weaken the Yuan either!

The USD$ is currently lower against the EUR +0.16%, GBP +0.21%, CHF +0.07% and JPY +0.18%. The commodity currencies are mixed this morning, CAD -0.36% and AUD +0.34%. BOC Governor is insistent that a strong loonie will damper longer term growth. He continued his bearish rhetoric on the currency yesterday, stating it was too strong and managed to push the CAD to a new 2-week low. The commodity based currency was dealt a blow from softer crude prices as OPEC suggested that they would increase output production if higher oil prices threatened global economic growth. With US equities under pressure, managed to lift the USD from its 14-month lows believing that the recent decline was somewhat technically overdone and has dissuaded the buying of higher-yielding commodity currencies. With a large percentage of the market being long CAD on the back of stronger global fundamentals, expect the technical traders to dictate short term direction as weak long’s get squeezed out. Dealers continue to see better levels to own their domestic currency. After breaching the 1.0600 level yesterday opens up the top side to 1.0750.

For the first time in 3-trading session, the AUD has managed to advance on the back of Chinese officials indicating that their industrial output will increase as much as +16% this Q. Australia and its commodity tied currency has the distinct advantage of having China as its largest trading partner, unlike its cousin, Canada, who has the US. Other data showed that Australian business confidence numbers surged last Q (16 vs. -4). With Asian bourses advancing, has boosted the demand for higher yielding assets like the AUD. The RBA keeps providing the ammo to lift the currency towards parity. They are expected to remain hawkish as Cbank officials make a number of speeches and economic forecasts over the coming weeks. Governor Stevens said it was ‘possibly imprudent’ to keep borrowing costs at a 50-year low in the minutes of its Oct. meeting. The currency remains better bid on pullbacks (0.9173).

Crude is lower in the O/N session ($78.55 down -13c). It was the tri-factor of trading reasons why crude prices softened yesterday. Firstly, OPEC is starting to talk crude down. Members will increase output production to protect the global economic recovery if oil prices continue to rise. They have indicated that both ‘producers and consumers were comfortable with oil prices at between $75 and $80 per barrel and that higher price’s could put a brake on the global economy’. Ideally, they want to ‘maintain balance’ and will act accordingly in Dec. depending on where crude is trading. This will surely put a short term dampener on speculative trading. Secondly, the dollar has rebounded from its 14-month lows, thus diminishing the appeal of commodities to investors. Finally, equities managed to see red. Oil prices had been pushed to New Year highs last week on the back of the weekly EIA report showing a bigger than forecasted decline in supplies of gas. Gas inventories fell -2.2m barrels to +207m vs. an expected drop of only -850k. On the flip side crude stocks rose +1.3m barrels to +339.1m vs. the forecasted climb of +1.5m barrels. Technically, prices have been aggressively mobile on pure ‘speculation’ in the face of positive overall supply fundamentals. Keep an eye on the USD for directional play until we get inventory numbers for this week.

The ‘yellow metal’ fell the most in over a week yesterday as the USD rebounded from its 14-month lows vs. the EUR which eroded the appeal of the precious metal as an alternative investment. However, expect the commodity to remain well supported on much deeper pullbacks as long term inflation worries continue to be a concern ($1,040).

The Nikkei closed at 10,212 down -150. The DAX index in Europe was at 5,649 up +8; the FTSE (UK) currently is 5,209 up +17. The early call for the open of key US indices is higher. The 10-year bonds backed up 4bp yesterday (3.56%) and are little changed in the O/N session. It’s not rocket science when you have product to absorb! Dealers continue to pressurize prices with a record $116b worth of US debt to be taken down this week. The US government is scheduled to sell $44b 2’s today, $41b 5’s tomorrow and $31b of 7’s on Thursday. With Treasury planning to lengthen the ‘average due date’ of its outstanding debt to 72-months from 49-months will obviously put pressure on the long end of the yield curve over the coming year. It’s no wonder that some analysts foresee 4% 10-yr notes before the year-end and 4.5% by middle of next year.

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